Use It, Move It, or Lose It: Protecting Your Property Line

The Ridgefield Press recently reported about the Land Conservancy of Ridgefield’s new “Good Neighbor” policy. In general, the program asks neighbors who abut preserved lands to keep track of encroachments, such as dumping leaves or paving driveways. Encroachments hinder the Conservancy’s mission to keep land in its natural state.

This gives me the opportunity to discuss one of my favorite topics, adverse possession.

Many of our clients have mistakenly believed that adverse possession is an ancient and arcane concept, when in fact it comes up all the time, both in Connecticut and New York. Town governments using land for governmental purposes are basically immune but private landowners are not. For private landowners, encroachments could mean the risk of losing part of their land through adverse possession. Over time, 15 years in Connecticut (10 in New York), encroachments can ripen into ownership rights and the original private landowner can lose a portion (or all) of his land.   

All landowners should take a tip from the Conservancy and follow their own good neighbor policy: be aware of property lines, observe any encroachments, and deal with them appropriately but promptly.

We would like to express our thanks to the Conservancy for performing an important, valuable and essential service. We all benefit from the preservation of land in its natural state.

Need more information about adverse possession? Click here:

 Image: Pierrepont Pond, Ridgefield, CT..

 

A New Lease on (Your Business) Life

According to a recent  Wall Street Journal blog, vacancy rates at malls and shopping centers in the top U.S. markets have climbed to their highest rates of this decade: 7.9% for malls and 9.5% for smaller, open-air shopping centers.


In today’s challenging economy, many struggling retailers – and residents – are approaching their landlords and asking for financial assistance or a reduction in their monthly rental payments. This practice, once considered a drastic measure, has actually become very commonplace.


Contrary to appearances, the parties are not on opposing sides. Both have the same goal: to keep the renter in business so he can continue to pay the rent. Facing a potentially long recession, it benefits both parties to come to an understanding in these situations.


Retail vacancies are on the rise, even in our own town of Ridgefield. If landlords and tenants come to an agreement, the lessee can continue to run his business, and the landlord continues to have a paying tenant. Of course, the terms of the negotiations should be agreed upon beforehand and clearly spelled out. It is also beneficial to have an attorney present to mediate or help resolve any potential conflicts.


Retail property owners that consent to abatement are putting their own financial future at risk. They also need to thoroughly analyze which of their tenants is deserving of the break; in other words, who is likely to succeed?


Tenants and renters cannot take a “hardball” approach to the situation, despite its frequency in these economic times. They should be willing to make concessions, put limits on the agreements and fully cooperate with the landlord. 

Image: New co-working reception area, Executive Pavilion, Ridgefield

 

What Does It Mean to Pre-qualify for a Mortgage ?

In Washington State, several real estate buyers have sued their bank because they “prequalified” for mortgage loans and later failed to qualify for the loans. Under the law and the customs and practices of Washington State, they buyers lost some $175,000 n earnest money. The story, by Martha Neil is on ABAjounal.com (“Buyers Sue Bank: Bad Prequalification Cost Them Money”). That was Washington State but prequalification can be a problem also in Connecticut and New York.

Here at home, clients often expect a “speedy’ closing because they have “prequalified” for a loan. We have to explain that prequalification often means you have passed a quick credit check based on limited information. What gets you a mortgage loan is a “commitment” letter from the lender and that is based on a complete loan application, an appraisal of the property and other documentation. The delay for clients who expected a quick approval from their lender can be frustrating.

 

 

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When Does a Real Estate Broker Earn Commissions?

(Our announced once-per week posting schedule was meant to be flexible and when inspired, like this week, we will post more frequently).

A recent appellate case provides a practical reminder for individuals selling real estate properties. As a bonus, it involves a favorite New York procedural rule, the CPLR 3211(a)(7) motion to dismiss.   The case is Steve Elliot, LLC v. Teplitsky, 2009 Slip. Op. 01104 (2d Dep’t).

 

The court’s decision is short and to the point; this post will exceed it in length but the court does not digress to explain its reasoning to non-lawyers.

 

The Brokerage Agreement and Commission

A real estate broker sued for a commission although the closing on the sale apparently never took place. The court points out that the usual brokerage contract provides that a commission is earned when “he or she has produced a buyer ready, willing and able to purchase the property upon terms that are acceptable to the seller.” However, the court also points out that the parties are free to add whatever conditions they wish to their agreement. 

 

In this case, the defendant alleged that the agreement unambiguously provided that a commission would not be earned until after the closing had taken place. On that basis, the defendant asked the court to dismiss the complaint. The court declined to dismiss it because, to the court, the agreement was not all that unambiguous (or, cutting out the double negative, it was ambiguous). Thus, there was a question of fact as to when the parties intended the commission to be earned. That, in turn, means no dismissal. The case moves forward, ultimately to trial if it doesn’t settle first.

 

The reminder: both brokers and clients need to be aware of the contract language and if they intend to deviate from the standard language, they should do so in writing and unambiguously. 

 

The Procedural Issue

As for the procedural issue, this case involved a New York CPLR 3211(a)(7) motion to dismiss, a favorite because of the subtle nuances on which a case can turn. Superficially, this is a motion, like the Connecticut motion to strike, that “tests the sufficiency of the pleadings.” That means if the facts alleged in the complaint do not add up to a legal claim, the case is dismissed at the outset. Whether or not the facts can be proven is not an issue because even if prove, they do not amount to a legal claim. 

 

In Connecticut, on a motion to strike, the test is whether the facts alleged in the complaint state a claim and submission of evidence is not allowed; the complaint is evaluated on its own merits. In New York (at least in the Second Judicial Department), evidence is allowed and the test is whether the plaintiff has a claim.

 

The distinction, although it may seem to be “inside baseball” to the non-lawyer, is an important one. In this case, submitted evidence, probably the actual agreement, showed that the agreement was ambiguous and that was sufficient to defeat the motion to dismiss.   

 

The motion to dismiss and the motion to strike are, each in its own jurisdiction, important procedural options to short-circuit and end a lawsuit before it gets really expensive. But, the rule can work either way. In this case worked for the plaintiff by showing that the claim was viable.

The Battle of the Photos: Adverse Possession, Photographs and Business Records

Sometimes cases and legal issues that superficially seem like “inside baseball” to our non-lawyer readers actually contain practical insights that property and business owners would find fairly interesting - - once an appropriate translation is made from the “legalese.”

A case in point: recently an appellate case in New York provided valuable insights into adverse possession. As a bonus, the case also provided lessons on an important evidentiary rule, the business records exception to the hearsay rule. The case is Corsi v. town of Bedford, 2008 NY Slip Op 09344 (2d Dep’t). 

 We’ve commented on adverse possession before, for example, here and here. At first adverse possession seems like an arcane subject – can neighbors really claim land that is legally not theirs and actually win? Yes, they can. And. it’s not arcane; cases come up all the time in our practice and certainly in the court system.

 

The plaintiffs, in this case, purchased a home in Bedford, NY. The town purchased the land next to the plaintiff’s property to preserve open space. The plaintiffs claimed a portion of that land on the principle of adverse possession – that they had openly, notoriously and continuously possessed it for 10 years under a claim of right. And, a unique statutory requirement in New York, the claimed land was “usually cultivated or improved” or “protected by a substantial enclosure.” Had the case come up in Connecticut, where we also practice, the time requirement would have been 15 years and there would be other, more subtle differences in the rules.

 

Lesson number one: adverse possession cannot be claimed against a municipality that owns land for governmental purposes (such as open space preservation). But, lesson number two also applies: if the town bought the land after the 10-year period had already expired, adverse possession would apply. Specifically in this case, the town bought the land in 2004 so if the plaintiffs can prove – by clear and convincing evidence – that they already possessed the portion that they claimed for 10 years in 2004, that portion is theirs.

 

Incidentally, for our non-lawyer readers, “clear and convincing” evidence is the highest level of proof for civil (meaning non-criminal) litigation. It’s a greater burden of proof than required in most civil matters. And, the burden of proof is on the plaintiffs; the defendant, the town, did not have to prove anything, they merely had to show the plaintiffs’ proof was insufficient.

 

Both sides used photographs as evidence. The bulk of the published decision really concerned whether certain aerial photographs, along with expert analysis, that the town submitted would be admissible. If the town’s photographs were not admissible, then the plaintiff’s photographs would not be contradicted and the plaintiffs would have the land. 

 

The trial court had ruled that the town’s photographs were admissible. The plaintiffs appealed.

The appellate court’s decision included a very clear, detailed explanation of the rule that would apply in this case. First, the court reviewed the well-established definition of hearsay: a statement made out of court, offered for its truth. For our non-lawyer readers: hearsay is not admissible because, among other reasons, having been made out of court, it was not made under oath and is unreliable. There are many exceptions to the hearsay rule and trial courts have a lot of discretion in how they apply this rule. 

 

An exception to the hearsay rule that applied in this case was the business records exception. Thus, lesson number three: records kept in the normal course of business are considered reliable (and, therefore, admissible) because they are not made for the purpose of the litigation. But, there has to be proof (a reliable and credible witness) to establish that the records are authentic and were, in fact, maintained in the normal course of business.

 

Image: A diagram of the major roads of northwestern Bedford, NY, traces on USGS aerial photo; Wikipedia Commons.

 

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NY High Court: Attorney may Disapprove Real Estate Contracts for Any Reason

New York’s Court of Appeals, the highest appellate court in the state, recently issued a decision that is incredibly simple on the surface but requires a bit of background to be appreciated by non-lawyers.

The case is Moran v. Erk, November 25, 2008. It was brought to my attention by ABAJournal.com which relied on a Newsday report.

 

The ruling was that a lawyer may disapprove a contract for the purchase of real estate for any reason because attorney-client confidentiality would be destroyed if the attorney had to testify about the reason for disapproval.   The decision is logical and simple. But there are broader issues involved. First, why is an attorney approving or disapproving a contract?

 

You need to be aware that “customs and practices” that govern real estate transactions vary not only by state but within the states. Both in New York and Connecticut there are variations within the states. Our firm is most familiar with procedures in downstate New York and Fairfield County, Connecticut - - and there are significant differences.

 

The Moran case was from upstate New York. There, it is apparently common for contracts to be signed without the advice of an attorney. But, the contracts commonly include an “attorney contingency” clause giving the buyer three days to review the contract with an attorney and, within that time, giving the attorney the option to disapprove of the contract. In this case, the attorney disapproved for the simple reason that the clients changed their minds. The property that was to be sold to the defendants for $505,000 was ultimately resold for $385,000.

 

The broader issue in both states, regardless of area or county, is whether brokers should be permitted to supervise the execution of contracts for the purchase of real estate before the parties have had the opportunity to consult their respective attorneys. I understand that in some areas/counties it is now common practice to do so - - areas where we don’t practice and so can not comment specifically. Where we practice, the custom is to negotiate the final contract with the assistance of an attorney- - before it is signed.

 

There are good arguments on both sides on the issue of whether brokers should or should not be permitted to supervise the execution of contracts.  And, the attorneys lobbies and the brokers lobbies are articulate in making their case for either practice. To review all the arguments here would extend this blog post to infinity.

 

Note, however, that area custom can create a necessity. It is a very bad idea in areas, like downstate New York and Fairfield County, Connecticut, where the common expectation is that you will have the assistance of an attorney, to try to do without one.

Confusion Arises Over Who Owns the Mortgage

The flood of foreclosures has created more than one kind of confusion, the latest coming to light is over who owns the mortgage and has the right to foreclose.

The situation was reported both by the Wall Street Journal Law Blog (Foreclosure Mess: Two Different Plaintiffs Claim to Own Same Mortgage”) and ABAJournal.com, citing the WSJ post (“Practice Tip for Foreclosure Defendants: Make Sure Lender Owns Mortgage”).

 

The confusion comes about, of course, because mortgages have been packaged, “securitized,” and sold, possibly several times over. Identification of the legal entity with ownership rights may become unclear. Or, simple bureaucratic confusion among the entities serving as trustees and servicers may lead to errors.

 

As suggested by ABAJournal.com, the situation is of more than just humorous interest. It may suggest a defense.  

 

NY Appellate Court: Money Paid In Court Does Not Stay Foreclosure Sale Without a Motion

Plaintiffs in New York foreclosure actions are aware that they must follow procedure carefully to foreclose a mortgage on real property. A New York appellate court remindsus  that the same is true of the defendant.

The case is NYCTL 1999-1 Trust v. 573 Jackson Avenue Realty Corp., 2008 N.Y. Slip Op 08173.

 

The defendant paid all the money due on the mortgage into court. Since the foreclosure sale was pending, the defendant notified the plaintiff and stated that the sale should be stayed (halted, for nonlawyers) “per statute.” The Court noted that the governing statute, NY RPAPL sec. 1341, requires the trial court to dismiss the complaint and stay all proceedings. In fact, the court has no discretion about it, all proceedings are to be stayed.

 

The sale went on anyway. The First Department of New York’s Appellate Division, in disposing of the appeal, pointed out the statute is not “self-executing.” The defendant needed to make a motion. Since no motion was made, the foreclosure sale stands. Not only that, but even though the plaintiff was notified, the plaintiff had no obligation to warn the defendant that the sale was going to go on anyway in the absence of a motion.

 

The lesson here is more for attorneys than business managers although the latter should certainly be aware of that there are procedural pitfalls in foreclosure proceedings, for either side.

Reminder From NY Appellate Court: In Real Estate, Rely Only on the Written Contract

A New York Appellate Court, in a recent decision, reminds us that in a real estate transaction, the parties should rely only on the written contract. The case is Friedman v. Kagan, 2008 Slip Op. 07624 (2d Dep’t).

The plaintiffs commenced the lawsuit because, having purchased a single family residence, they claimed the defendant/sellers dissuaded them from having the basement professionally inspected for mold. The house was contaminated with “toxic” mold. But, the written contract included a disclaimer that the purchasers were not relying on oral representations and the house was being sold “as is.”

 

The trial court granted summary judgment to the defendants and the appellate court affirmed. For our non-lawyer readers, that means decision for the defendants without a trial because there are no facts at issue. The facts not at issue are that the written contract disclaimed any reliance of oral representations.

 

The plaintiffs tried an alternative theory that the mold was fraudulently concealed but that went no where either.

 

We shouldn’t need the reminders but, being human, repetition is helpful: a real estate contract has to be in writing. A disclaimer, similar to that found in this case, tends to be the norm. Thus, the parties should not rely on oral representation, they should “get it in writing.”

 

Image: Slime Mold from Wikipedia Commons

Article Summarizes New York Law Regulating Foreclosures and Subprime Lending

The Real Property Law Section Blog, a private blog of the New York State Bar Association, recently alerted us to an article summarizing new legislation in New York designed to protect homeowners in foreclosure and subprime borrowers. The article is by Kirsten Keefe and Elizabeth Hasper or the Empire Justice Center and is entitled “New State Law Addresses Mortgage Foreclosure Crisis and Subprime Lending Abuses.”

A summary of a summary may inevitably leave out important information so we recommend reading the entire article. However, among the highlights that we noted:

 

  • Criminalization of “Residential Mortgage Fraud;”
  • Ninety-Day Pre-Foreclosure Notice;
  • Mandatory Settlement Conferences;
  • Restrictions on Mortgage Brokers;
  • Regulation of Mortgage Servicers.

And, we noticed that in various places the remedies can include reimbursement of attorneys’ fees and even treble damages.

 

In short, the new Foreclosure Prevention and Responsible Lending Act appears to be tough. It creates new requirements for lenders and brokers, created new defenses for borrowers and, in addition to criminalization of outright fraud, created new remedies for borrowers who have been abused. We’ll have to wait to see how it works in practice.

Countrywide Mortgage Loans to Be Restructured

Both ABAJournal.com, in a story by Debra Cassens Weiss (“Bank of America to Modify Countrywide Mortgages in $8.6B Deal”), and Law.com, in a story by Christopher Wills (Bank of America Settles Suits Over Bad Mortgages”), carried the news that Bank of America has agreed to modify mortgage loans written by the former mortgage lender, Countrywide. Bank of America had acquired the Countrywide loan portfolio and, thereby, also acquired the task of defending the suites brought by various Attorneys General against Countrywide. According to Law.com, Connecticut is among the states participating in the settlement that will end these particular lawsuits.

According to ABAjournal.com, the loan modifications may include the following:

 Bank of America will modify loan terms for homeowners who are seriously delinquent in their mortgages or likely to become unable to make their payments. The program would reduce principal owed for some loans and reduce interest rates for others. The program would cut mortgage payments to no more than 34 percent of borrowers’ income.

We are in no position to evaluate the particulars and judge the adequacy of the relief obtained through this settlement. But, it does seem to be far better to settle the lawsuits and get some relief flowing to the borrowers rather than extend the lawsuits. At the same time, Bank of America can focus on setting an appropriate future course for its mortgage business.

Finding Opportunities in Uncertain Times: Develope a Longer Term Perspective

A recent blog post suggesting that decreasing asset values present opportunities did not get my full appreciation until I put it together with an unrelated experience in an estate litigation case to draw a broader lesson.

The post was in the Utah Business, Real Estate and Estate Planning Blog, by Matt Fankhauser and entitled “A Silver Lining in Decreasing Asset Values.” The point was that decreasing asset values present opportunities for high net worth individuals. With gift and estate taxes not likely to go away, individuals can make gifts at a discount (that is, at depressed values) to take maximum advantage of lifetime gift tax exemptions and annual exclusions. 

 

While seemingly unrelated, the idea brought to mind my experiences with the parties in a will contest that was resolved only after years of litigation.

 

Valuable investment property had been in the family 35 years with the decedent refusing to allow it to be sold in her lifetime. One party in the will contest fought to gain control of that property intending to keep the property from being sold and as a family asset even longer. The estate also happened to include overseas properties that may have been owned by the decedent for 50-60 years.

 

In holding properties 35, 50, 60 years, the decedent (and other family members) exhibited a distinct long-term mindset. Since they intended to hold on to the assets for the long term, this family might very well consider a period of depressed values to be an opportune time to make tax-saving gifts.

 

More generally, a longer-term mindset, even in an uncertain economic environment, may identify opportunities that would otherwise be overlooked. That is as true of personal financial issues, such as estate and gift tax planning as it is of core business issues.

Managing Contract Work: Implied Contract Can be the Basis of a Breach

The Delaware Business Litigation Report reported an interesting construction contract case with the following introduction:

This case will give pause to contracting parties who consider taking on responsibilities beyond the written terms of the contract.

 

The post (“Superior Court: Implied Contract Created When Party Accepts Responsibilities Beyond Written Terms”) was by R. Christian Walker of DBLR and the case was Gay v. Delmarva Pole Bldg. Supply, Inc., 2008 WL 2943400 (Del. Super. Ct.).

 

The title of the DBLR post and the introduction provide a pretty good capsule description of the case; we refer you to their post and the case link for factual details.

 

We don’t normally cover Delaware law but the result in this case, on similar facts, might very well be the same in states other than Delaware - - for example, Connecticut or New York. The case reflects basic contract law but an aspect of it that might be overlooked by busy managers who are not lawyers. 

 

The actual case was complex because there were twists and turns as the story unfolded. But, the principles are basic. Despite the written contract, the Court ruled that the actions of the parties, once the Court unraveled and understood them, created an implied contract and that one of the parties breached the implied contract.

 

Independent business owners and managers may balk at the suggestion that they should establish strict procedures requiring written approval from customers for changes in the scope of work. It may seem too bureaucratic for an entrepreneurial business. And, some changes may be too trivial to go to the trouble.

 

But, as implied by DBLR’s introduction, this case is a cautionary example of the possible result if a contractor undertakes work beyond the scope of a project established in a written agreement.

Follow-up: New York's Revised Adverse Possession Law

In a prior post, we reviewed news reports that New York had revised its adverse possession law and asked readers to stay tuned because we had not seen the law or any analyses of it by legal commentators.

As a comment to that post, Kathleen Walling, apparently a party in the Court of Appeals Walling v. Przybylo case, provided the text of the bill signed by the governor and comments to the bill by the New York State Bar Association. Some technical glitches garbled a few worDs in the comment but the context makes the Bar's general meaning clear. According to news media, the new law was  intended to reverse the holding in the Przybylo case. Apparently, the Bar Association did not like the bill because they recommended a veto. 

The issue was whether an adverse possessor should have a reasonable basis to believe the adverse possessor owns the property being claimed. The Bar Association did not believe the bill (now law) would accomplish its purpose.

I have a lot of respect for the Bar Association’s analyses of legislation, especially when it concerns how a law may be interpreted and applied. However, once a bill becomes law, what counts is how the courts will interpret it. For that, we will have to wait.

For this blog, our perspective is to review developments in litigation and try to derive better management practices. We cover real estate cases as “business litigation” because the business of some of our clients is real estate investment (albeit not in a Donald Trump scale) and for others the home is one of their biggest investments. We draw insights from business litigation not juston how to prevent litigation or win but also to promote productive business practices.

From that perspective, our view of adverse possession remains the same. It is not going to be abolished because it does serve a positive purpose in certain situations to resolve boundary and title issues. 

However, both title owner and potential adverse possessor benefit form simple practices:  obtain and learn to read a survey, walk the property lines and address encroachments well before adverse possession becomes an issue (10 years in New York, 15 years in Connecticut). There is almost no downside to these procedures for either party. We are not suggesting that every boundary dispute can be prevented. But then, we are identifying better practices, not trying to find guarantees.

Homeowner Saves House From Foreclosure

Our previous posts on subprime lending and foreclosures have highlighted defenses that turned the tables on the lenders and how courts around the country are scrutinizing foreclosure filings and, if defective, not allowing the proceedings to go forward. Our most recent posts on this subject, with links to others, are available here and here

Now, the New York Times has published an article illustrating how the packaging and transfer of mortgage loans created a new opportunity for a homeowner to keep her home. The Times article, “How One Borrower Beat the Foreclosure Machine,” by Gretchen Morgenson was on page 1 of its July 27, 2008 Sunday Business edition (we did not locate an online version to link). 

The article was about how a 74 year old former housekeeper saved her house from foreclosure.  While the story took place outside the jurisdictions in which we practice, it involves general principles of law and nationwide business pratices.

With our economy continuing to decline, more and more homeowners are faced with the very real prospect of losing their homes to banks and other lenders in foreclosure proceedings. In today’s mortgage market, most banks and lenders “repackage” mortgage loans and sell or assign the mortgages in a “secondary mortgage market.” This means that, more often than not, the bank which originally loaned the money is not the bank which winds up owning the note and, therefore, has the legal ability to collect on that debt. The legal ability to collect on the debt depends on who owns the note at the time a foreclosure proceeding is initiated.

In the case of the 74 year old former housekeeper, according to the Times, her ordeal unfolded and ended with a favorable settlement as follows: She filed for bankruptcy protection to save her house and made mortgage payments to the bankruptcy trustee (the person who oversees the bankruptcy proceeding). The Bank of New York sued to foreclose on the mortgage – but the bank sued before it legally owned the note. The “package” of loans had not yet been transferred to the bank, as trustee. The bank, therefore, had no “standing” or legal authority to sue. It took five years of litigation before the Bank of New York finally settled the matter – by reducing the principal loan balance and paying the homeowner’s attorney’s fees.

Most homeowners facing foreclosure don’t have the financial resources to fight banks for five years, but there are steps that homeowners can take before foreclosure proceedings begin.   Preferably with the assistance of an attorney, the homeowner can negotiate with the banks’ attorneys to restructure mortgages and find other viable solutions to help homeowners keep their houses. Ultimately, banks are in the business of making loans, not owning houses as a result of foreclosure proceedings.   

Image: From Wikipedia Commons: Margaret Sadler and her attorneys Michael A. Robinson and William L. Henry. Ms. Sadler is holding the original promissory note and altered promissory note in her foreclosure. Colorado District Court Judge Vincent White dismissed the foreclosure when the Bank of New York was unable to show that they were the real party in interest.

 

Foreclosures Being Scrutinized Around the Country

We have previously commented on cases in which the table were turned on a lender in the middle of a foreclosure proceeding or the foreclosure was stopped by a defense such as discrimination, for example, here. But, those were individual cases and limited to New York.

The Wall Street Journal Law Blog, in a a post by Amir Efrati, now reports that judges around the country are scrutinizing foreclosure documents and not allowing the foreclosure to go forward if they find serious discrepancies (“Subprime Legal: Judges Scrutinize mortgage Docs, Deny Foreclosures”).  

Our perspective on this remains the same: probably only a small percentage of borrowers can be helped by any of the defenses or discrepancies reported in these cases. But, good financial management, which should apply to personal finances as well as business, requires that all options be properly reviewed and considered.  An opportunity may be missed if the borrower simply concedes at the outset and lets the foreclosure go through without scrutiny.

Pyrrhic Victory: Brokers Win One, Lose Two

Pyrrhus of Epirus, Image from Wikipedia CommonsTwo mortgage brokers in Pennsylvania might want to consult the Wikipedia entry on Pyrrhus of Epirus after their experience with arbitration and a federal court.

Law.com carries their story in a post by Gina Passarella (“Brokers’ Employment Suit Backfires, Defendant Awarded $1.6 million) of the Legal Intelligerncer. It is an interesting, well written story, about Field v. Gateway Funding, and we won’t go into details since the full story is available by clicking on the title or here.

Essentially, the brokers sued because they claimed the mortgage company infringed on their promised, exclusive sales territory. The case went to arbitration and they won well over $300,000. Problem: the defendant won too, on two claims that: (1) the brokers took advances they did not earn and (2) they provided confidential information when they went to work for a competitor. A federal court confirmed the arbitration award. The net award against the brokers: $1.6 million.  

A few general lessons:

1. The case illustrates the inherent uncertainty of litigation.

2. It is possible that the brokers knew they would be sued so they sued first but, in fact had to litigate. It is also possible the brokers should have had a better understanding or acceptance of their position before commencing litigation. We don’t have the actual back story.  But, it sure looks like if they had quit while ahead, they would have been way ahead.

3. The case illustrates the general nature of arbitration. It is a more efficient, less costly way to resolve disputes and mandatory under some contracts. But, once the arbitrator makes a decision, the courts will generally confirm it. Exceptions are very narrow and hard to get.

Clients will sometimes resist the suggestion to settle or drop a claim. They want a victory. But, a pyrrhic victory is a costly one.   

Image: Pyrrhus of Epirus, from Wikipedia Commons

Court Rules High Interest Creates Presumption of Discrimination

In yet another instance of turning the tables on a foreclosing lender, a New York Supreme Court judge has held that a mortgage loan at a rate of interest that exceeds nine percent, made to a member of a minority group for a property in a minority area, raises a rebuttable presumption of discriminatory practice.  The consequence of the Court’s holding is that the burden of proof shifts to the lender which must prove by a fair preponderance of the evidence that the loan was not discriminatory or face dismissal of its foreclosure proceeding.

The case, M&T Mortgage Corp. v. Foy, 20 Misc.3d 274, 858 N.Y.S.2d 567, 2008 WL 1915125 (Sup. Ct. Kings Co. 2008) was reported in the private blog of the Real Estate Section of the New York State Bar Association.

Just in our last post we discussed a story in Law.com about borrowers suing their lender instead of waiting for the lender to foreclose and two of our earlier posts,here and here, were about cases where the Court treated the foreclosing lender harshly.

In the M&T case, the Court invoked equitable principles in refusing to simply allow the foreclosure proceeding to reach its logical conclusion if the result would be inequitable:

Equity, which abhors unconscionable and unjust results, mandates a shift in the burden of proof to the plaintiff-lender to demonstrate that the loan is not discriminatory. Indeed, our decisional law has long since recognized that a litigant seeking affirmative judicial action in equity ... may not succeed if [the litigant] is asking [for] an inequitable or unconscionable result. (Internal quotation and citations omitted).

The possibility of raising the issue of discrimination, of course, would be relevant only in a case involving a member of a minority group. The cases discussed in earlier posts were not so limited. All the cases under discussion are subject to appeal. The Supreme Court, for our out-of-state readers, is a trial court in New York, not an appellate court.

Most borrowers faced with foreclosure may feel helpless. And, we have to concede that in most cases the borrower may not have any really good options. However, where there is a suggestion that the lender's practices were questionable, the borrower would be well advised to seek legal counsel and consider all the options available. At a minimum, there might be a way to develop leverage for negotiation with the lender.

Predatory Lending: Borrowers Fight Back

Law.com reports that individual borrowers are taking preemptive action against their lenders by suing over deceptive lending practices. The story, “Saying They Were Tricked, Borrowers Fight Back With Lawsuits,“ is by John Pacenti of the Daily Business Review.

We have previously commented on New York cases where the tables were turned on lenders who had started foreclosure proceedings here and here. And, state regulators in various states are suing major lenders over general practices. 

The Law.com report involves cases from around the country that are different from the New York cases because the individual borrowers are not waiting for foreclosure proceedings (and may not be at risk of foreclosure). Nor, are they waiting for state regulators to sue. Instead, the borrowers are starting the lawsuits. 

According to the Law.com report, borrowers complain of practices typical of predatory lending, such as: the lender telling customers interest rates were fixed when they were adjustable, misrepresentations about the length of the loan and teaser rates where rates, in the long-term, are higher. At stake: damages that may include: reimbursement of all mortgage payments, finance charges and interest plus attorneys’ fees and costs.

Some of these suits are apparently supported by organizations formed to help borrowers, such as the Affirmative Defense Group of Margate, Florida mentioned in the Law.com report. 

individual borrowers who are not supported by an organization may have some tough choices to make, drawing on their emotional strength and financial resources, in order to fight back. 

But, with their homes at stake, it may be a necessary choice.

Adverse Possession Law Has Been Revised in New York

Acquiring property by adverse possession may be more difficult in the future, at least in New York.

I was alerted to a revision of the New York law of adverse possession, just signed by Governor Paterson, by Sui Generis - - a New York Law Blog in its New York Legal Roundup of July 9, 2008. The Roundup referenced linked to a report in Newsday.com by the Associated Press (Archaic Land Law Revised in New York).   Other news media carried the report.  Norrthcountrygazette.org provided a few background details, indicating this is an example of the legislature trumping the state’s highest court (NY’s Adverse Possession Law Revamped).

We have commented on adverse possession and explained what it is in prior posts here and here.

While Newsday characterizes adverse possession as an “archaic” law, our firm can attest from recent experience that adverse possession is a very live concept in both New York and Connecticut. Research queries turn up many recent cases. 

Media accounts of the new (actually, revised) law are broad-brush. According to the Newsday.com report, the acquisition of a neighbor’s land by adverse possession “will not happen simply because a fence, hedge, shrub, shed or other minimal, nonstructural item is placed across the deeded property line.”

According to the Northcountrygazette.org report, the new law requires that a “claimant have a ‘claim of right’ or ‘reasonable basis for the belief’ that the property is theirs to take by adverse possession.” Northcountrygazette.org also reports that the law is the ultimate product of legislators’ efforts to trump the Court of Appeals and reverse the law created by the case of Walling v. Przybylo,7 N.Y.3d 228, 818 N.Y.S.2d 816 (2006), holding that actual knowledge by the claimant that another person is the owner by deed does not defeat an adverse possession claim.

The news reports do not provide enough details to fully understand the changes. We will comment further when the text of the statutory changes and technical legal commentaries are available. Please “stay tuned.” 

In the meantime, it is still a fact that adverse possession can be “defeated” if property owners walk their property lines, make a note of any encroachments and, with their attorneys, take prompt, appropriate action - - before it’s too late.

How Do You Cross-Examine an Ostrich?

Readers might have noticed that we like commenting on posts in the Wall Street Journal Law Blog. We don’t cover “Big Law” or “Big Business” nor do we usually comment on criminal law, all LB specialties, but some LB posts just stimulate thought and, in this case, memories.

So it is with the recent post by Dan Slater on how Judge Richard Posner, U.S. Court of Appeals, 7th Circuit, allowed the “Ostrich Instruction” in a criminal jury trial (“Conrad Black’s Sentence Upheld; 7th Circuit OKs Ostrich Instruction”). We’ll pass on commenting on the criminal matter under discussion in the post.

Instead, the concept of an “Ostrich Instruction” reminded me of our firm’s experience with a civil matter, specifically an adverse possession matter that also involved a jury trial. I believe that without being aware at the time, we were confronted with a similar concept which, with apologies to Judge Posner, we will call the “Ostrich Defense.”

An earlier post on this blog generally described the concept of adverse possession ("Losing Your Property Rights Through Inattention". For the sake of brevity, we will now simply say it is a claim that you own part or all of your neighbor’s property after a prescribed period of claimed continuous possession; there is more to it, of course, and for the rest I refer you to the earlier post.

The “Ostrich Instruction,” in a criminal context, is explained by LB in its post with a quote from Judge Posner, who coined the term, as follows:

An “ostrich instruction,” Posner explains, “tells the jury that to suspect that you are committing a crime and then take steps to avoid confirming the suspicion is the equivalent of intending to commit the crime.” Posner also clears up a fallacy: The legend that ostriches bury their head in the sand when frightened, he says, is “pure legend and a canard on a very distinguished bird.”).

The situation involving our derivative “Ostrich Defense” was as follows: In New York, for adverse possession, it is a settled principle that when claiming ownership of a neighbor’s property, the claimant’s knowledge of the actual boundary lines is not all that relevant. However, acknowledgment of the boundary lines would soundly defeat the claim. 

In our adverse possession case, the claimant maintained he could not possibly have acknowledged the boundary lines because he never had knowledge of the boundary lines. This, despite signing numerous documents submitted to municipal authorities that did acknowledge the boundary lines. He claimed to have signed the documents in blank so he never could have had the requisite knowledge

There was, of course, cross-examination (by our firm’s other partner Beverley Rogers) and the jury found for our client, the property owner. On appeal, the claimant dropped the adverse possession claim and tried only for a prescriptive easement, where you have right to use but do not own the property. That failed too, the appellate case is 40 AD3d 577, 834 N.Y.S.2d 330 (2d Dep’t 2007).

Well, how do you cross-examine a witness who is relying on the “Ostrich Defense?” Persistently. In this particular case, it was a matter of allowing the claimant to bring out his own inconsistencies.

On the other hand, could the “Ostrich Defense” actually be effective? I have to concede it could be a legitimate and effective defense in a civil matter under the right circumstances.

But, that would be a different case and a different post.

What Do You Win When You Win At Trial?

Many people remember the long-running Broadway (and national) show, Les Miserables, or, at least, its music. Some may also remember that it was based on Victor Hugo’s 19th century novel Les Miserables and that both the old TV program and the movie, The Fugitive, loosely reflect the same novel in story and concept. The character, Inspector Javert, the detective who doggedly pursues the main character, Jean Valjean, for years, may be less-well remembered.

I was reminded by a recent court decision that many prospective plaintiffs need to contemplate whether they will have to become Javerts themselves in order to gain any benefits from their litigation. 

Thus was I thinking when I read the decision reported recently in the private blog of the Real Property Law Section of the New York State Bar Association. A New York County Appellate Division decision (for out-of-staters: first level of appeal after a trial in the court of general jurisdiction, the Supreme Court), held that a renewal judgment is entered as of the date it was granted, and the liens of mortgages (recorded prior to that date) receive priority over that judgment. Gletzer v. Harris, 2008 WL 678589 (Sup.Ct., N.Y. Co.). The controversy arose when a judgment creditor applied for renewal of a judgment lien for a second ten-year run and was ultimately granted the renewal but nunc pro tunc (retroactively) to a date four years earlier.

The decision is somewhat technical and its impact may not be appreciated without a great deal of background. However, the decision affords the opportunity to fill-in some of that background by reviewing fundamentals that should be reviewed with a client before commencing a lawsuit. One can start with a very fundamental question: what do you win when you win at trial?

In most cases, you win a judgment. If it is a money judgment, you hope that the defendant will simply pay it. And, many do pay, which in that case ends the discussion. If the defendant doesn’t pay it, what have you won? 

 

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Another Case of Turning the Tables on a Sub-prime Lender?

Only a few days ago we thought we were being lawyerly and careful in observing that it’s not often that the tables will be turned on a foreclosing lender as they were in the LaSalle case on which we were commenting at the time. The Law Blog of the Wall Street Journal recently reported another lender had been “dinged” (LB’s term) in court. The LB post provides a link to the Wall Street Journal news story.

The situation, in this case, involved some letters that were possibly forged and used as a basis to threaten foreclosure. The lender’s explanation, as reported in the WSJ news story was that the letters were re-created electronically by an employee.

The WSJ also reports that an executive of Countrywide Financial, the lender, testifying before Congress, admitted that sometimes employees made mistakes but denied that the lender intentionally abused its homeowners. 

I would give Countrywide the benefit of the doubt. Mistakes are probably more common than outright, systematic abuse. But, in our post we were making a limited point: that the borrower/homeowner, threatened or in the midst of foreclosure, should consult an attorney and explore all options. That is just as true when dealing with “employees’ mistakes” as it is in the case of intentional wrong-doing.  

Predatory Lending: The Tables Turned

The tables have apparently been turned on the lender in a foreclosure case involving allegations of  predatory lending and coercion to accept a sub-prime mortgage. The case, reported by the Real Estate Section of the Westchester County Bar Association in its private blog is LaSalle Bank NA v. Shearon, 19 Misc.3d 433, 850 N.Y.S.2d 871, 2008 N.Y. Slip Op. 28032 (Sup.Ct. Richmond Co. 2008), and was before the New York Supreme Court in Richmond County.  

(For our non-New York and non-lawyer readers: the Supreme Court is not the highest court in the State, it is the trial court in this case;  and Richmond County is better known as Staten Island.)

In LaSalle, the Court refused to grant summary judgment to the foreclosing lender, instead, granted summary judgment to the borrower and scheduled a hearing on what damages were to be awarded to the borrower.  The damage award possibilities included: voiding the mortgage, returning all payments, returning all expenses of making the loan and attorneys fees. The Court found the lender had violated N.Y. Banking Law section 6-L (“High Cost Home Loans”). Apparently, the following acts of the lender brought on the reversal of fortunes:

  • Lending in excess of the purchase price to finance points and closing fees;
  • Leaving the borrower with negative equity;
  • financing fees and points in excess of 3% of the loan;
  • failure to undertake due diligence regarding borrower’s ability to pay a high-cost mortgage;
  • Not issuing to the borrower a required consumer caution notice.

The borrower had been loaned $355,100 to purchase property for $335,000. The contract reflected a “seller’s concession” of $20,100. A $5,000 deposit had been lost in the shuffle.

Interestingly, the borrower did not make a cross-motion for summary judgment. This was an instance where the Court “searched the record” and exercised its authority to grant summary judgment to either of the parties, not necessarily the one making the motion.  For our non-lawyer readers, a summary judgment motion involves a contention by the side making the motion that the facts are not disputed and the Court can decide the case on the law without a trial.  In this case, the lender made the motion.  

The Supreme Court decision and any award of damages are subject to appeal so we don’t know whether any of this will stand. Still, it’s a remarkable turn of events at this point in the case.

It would be unrealistic to expect an outcome such as this to happen very often in foreclosures. However, the case does illustrate that the careful borrower should consult an attorney and examine all options, whether available through negotiations with the lender or through the appropriate legal process.

Condominium Common Charges and a Troubled Mortgage Market

For condominium board members or concerned unit owners, a concise, clear summary of how to collect unpaid condominium common charges appears in the New Jersey Law Blog of Stark & Stark. To read the entire article by Robyn Nolan Howlett, click here.

Current headlines about the troubled mortgage market lead us to suggest just a bit of additional perspective. Overextended financing undoubtedly affects some condominiums as it does individual homes. That means, in some cases, the obvious option, foreclosure, is not such a good option. 

As pointed out in the article, the first mortgage has priority. If the owner’s equity has declined to zero, foreclosure proceedings will not recover the unpaid common charges. In fact, the equity need not decline quite to zero because the process of foreclosure may itself erode what little equity is left.

If the unit owner has personal property, which in legal jargon includes money in the bank, one of the other options mentioned in the article, a contract action, may be more effective. A better option still, also mentioned, may be to negotiate some sort of payment schedule so the unit owner can retain ownership and “catch-up.” It may not be an easy negotiation if the owner is also negotiating with a bank, but all parties may benefit by avoiding the costs and declines in value that accompany a foreclosure proceeding Still, whichever option is chosen, we concur with Ms. Howlett’s conclusion that prompt action by the Board is critical.

Losing Your Property Rights Through Inattention

I was recently reminded that property owners are still losing property rights through inattention – or embroiling themselves in costly lawsuits to retain their property rights. The legal mechanisms of “adverse possession” and “prescriptive easement” can have such consequences. And, the “best practice” for avoiding the consequences is amazingly simple: just pay attention to your property. 

The memory trigger for this commentary was an e-mail newsletter of “current developments” offered as a helpful service by a New York title company, First American Title Insurance Company of New York. A recent issue described still another adverse possession case on Long Island. An adverse possession case triggers strong memories in our firm because one particularly intense case lasted through 13 days of trial. 

Adverse possession, in plain language and greatly simplified, is the legal means by which a person can obtain title to real property without paying for it. The adverse possessor simply acts as if he or she owns it for a long enough period of time – for example, in New York 10 years, in Connecticut 15. A prescriptive easement is similar but involves not ownership but use – you can gain the right to continue a use in perpetuity on property you do not own. Although these concepts may sound odd and unfair to a person unfamiliar with real property law, they have sound bases in logic and, once examined, actually involve fair and reasonable principles of law. Ownership and the right to use property should not remain ambiguous or subject to challenge indefinitely so under appropriate circumstances the law provides a way to “settle” either title (adverse possession) or the right to use (prescriptive easement).

Of course, actually invoking these concepts is not so simple and there are rigid legal requirements subject to highly technical definitions and rules. For example, under New York law: To obtain legal title, the would-be adverse possessor bears the legal “burden” to offer proof that is “clear and convincing.”  This is a level proof somewhat less than “beyond a reasonable doubt” that we know about from criminal cases but certainly greater than the “preponderance of the evidence” required in most non-criminal legal disputes. If claiming the land without a deed or other documentary proof, the offered proof must demonstrate that possession was “hostile and under a claim of right,” “actual,” “open and notorious,” “exclusive,” and “continuous” for the statutory period (i.e., 10 years in New York). In addition, the would-be adverse possessor must demonstrate, with the same level of “clear and convincing” proof, that the property was “usually cultivated or improved,” and “protected by a substantial enclosure.”

To obtain a prescriptive easement, it is not necessary to show possession, only use. And, there are no requirements involving “usual cultivation and improvement” and “substantial enclosure.” Nor, does the use have to be exclusive. For example, you may be entitled to nonexclusive use of your neighbor’s path. However, a prescriptive easement cannot be obtained if the use is carried on by permission. If the other standards are met by the would-be prescriptive user, the owner bears the burden of establishing that the use was carried on by permission.

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"DEAR BEV" - JUST THE FAQ"S: Should Seller who backed out reimburse Buyer for cost of inspecting the house?

Q    I made an offer to buy a house and it was accepted. I then spent money having inspections performed, but before the contract was signed, the seller backed out of the deal to sell the house to another buyer, at a higher price. Shouldn't the seller have to reimburse me for the money I spent on the building inspections. What recourse do I have?

   Unfortunately, this situation happens in real estate. It happens more often in a real estate market which is "hot" -- that is, there are more buyers for houses than there are houses for sale. It happens less frequently in the type of slow real estate market we are currently experiencing. 

    The specific answer to your question may depend upon the laws, customs and practices of the state in which the real estate is located. We can discuss some general principles that apply in most situations of this type. For example, New York and Connecticut, where we practice, have both established the long-standing principle that to be enforceable a contract for the sale of real estate must be in writing. And, in writing means that both parties must sign the contract and it must be delivered by the last signing party to the other.

      On the other hand, buyers and sellers may enter into preliminary agreements, which also must be in writing, signed and delivered called “Binders” or “Offers to Purchase.” Since the freedom to contract a fundamental right, the parties can agree in such preliminary agreements that, to use your example, the cost of inspections is reimbursable if a final contract is not signed. If there is such a “Binder,” then you may be entitled to reimbursement for your costs. Read the Binder.

    But, unless in the initial "Binder" or "Offer to Purchase" all parties to the transaction agree to reimburse the buyers for inspections if the seller backs out, you have no recourse. There are always risks in buying and selling real estate. While most sellers honor the "accepted offer" and go forward with the sale, some don't and buyers foot the bill. I always recommend to buyers that any offers that are made and accepted be accepted with the understanding that all other offers are to be "back up offers" only. It's no guarantee but hopefully acts as a reminder to all concerned that they have an obligation to deal with each other in good faith.